Households risk further rates pain, economists warn

A reprieve after the rate hike could be off the cards as Australia’s central bank battles to tame persistent inflation.

Borrowers are facing the prospect of further rate pain when the Reserve Bank board convenes for its final meeting of the year.

Delivering her first rate hike to 4.35 per cent as RBA boss on Tuesday, governor Michele Bullock flagged that taming inflation had proved more challenging than anticipated, leaving the door open to raising interest rates again.

But ahead of the December 5 meeting, economists are divided over whether the RBA will be forced to continue its punishing round of monetary tightening which has delivered borrowers 13 rate hikes worth 4.25 per cent since May last year.

Financial markets are pricing just a 7 per cent chance of a final hike for the year, and a 36 per cent chance of a move higher when the RBA board meets for its first meeting of 2024 in February.

Economists are split on the central bank’s next move on interest rates. Picture: NCA NewsWire / Martin Ollman

Oxford Economics head of macroeconomic forecasting Shaun Langcake said a combination of strong services inflation and fast wages growth would keep pressure on the RBA to tighten monetary policy further.

“We don’t think this will be an isolated rate hike,” Mr Langcake said following the decision.

“If the RBA are worried enough about the inflation outlook to hike rates, we don’t think a single 25 basis point increase will assuage their concerns.”

If wages data, to be released next Wednesday, was particularly strong this would “probably be enough” to ensure another hike in December, he said.

Adding to the case for a further rate hike were updated inflation and unemployment forecasts released by the central bank in conjunction with its rates announcement.

Money markets ascribe just a 7 per cent chance of a hike in December. Picture: NCA NewsWire / Monique Harmer

By the end of 2024, the RBA expects inflation will still be running at 3.5 per cent, compared to its previous forecast of 3.25 per cent, released in August.

Meanwhile, the jobless rate is forecast to be 4.25 per cent by late 2025, down from previous predictions of 4.5 per cent.

Luci Ellis, former RBA assistant governor and now Westpac chief economist, agreed that while further rate hikes were possible, there was not enough new information to warrant another rate hike in December.

“Given the upgraded inflation forecasts and lower unemployment forecast, though, they are likely to have even less tolerance for upside surprises than they indicated in recent communication,” Ms Ellis said.

“While a December move is unlikely, it is more likely that February meeting would become ‘live’ if the inflation outlook continues to lift.”

The RBA would likely be less tolerant of an upside surprise on inflation, Westpac chief economist Luci Ellis said. Picture: NCA NewsWIRE, Monique Harmer

Commonwealth Bank chief economist Gareth Aird said updated economic indicators released before the RBA’s first meeting of 2024 would ease pressure on the central bank to deliver another hike.

“Our expectation is that there will be enough signs in the data by early next year for the RBA to conclude that a further increase in the cash rate is not warranted,” he said.

The RBA’s quarterly Statement on Monetary Policy, released on Friday, which includes a full set of revised forecasts will provide further indications on the next interest rate move, economists said.

More to come.

Originally published as Households risk further rates pain, economists warn